Retail real estate has shown polarization in its performance, from its channels to submarket types. Will inflation produce more dichotomy? And what other trends are keeping retailers up at night? These are just some of the pain points for the sector as it continues to transform, according to Kidder Mathews, the largest independent commercial real estate firm on the West Coast.
Bricks vs. Clicks vs. Omnichannel
Retail buildings could be on a less-is-more path as omnichannel strategies take hold, showing that it’s not bricks vs. clicks, but all in one. In-person service with online fulfillment will help lower retailer’s real estate costs because of reduced footprints, but also negatively impact landlords. Eric Paulsen, Kidder Mathews’ Regional President of Brokerage for Southern California and Arizona, sees more people adopting the shopping approach of trying on a product in store and then getting it shipped to their homes.
Scott Blankenship, SVP at Kidder Mathews’ Bellevue, WA office, agrees, and notes that “retail optimism remains strong for those retailers that find the blend of online and in-person sales experiences.”
The Impact of Remote Work
There’s more than just distance between downtown and the suburbs these days. While urban retail continues to struggle, suburban areas will definitely continue to benefit from professionals working from home, the buying local trend, safer environments, and overall convenience, according to Susan Zimmerman, a Kidder Mathews SVP in Seattle.
“Work from home now allows consumers to focus housing decisions based on quality of life, schools, etc., and not commute times,” added Robert Coron, SVP at the firm’s Bellevue, WA office. “This has invigorated many of the smaller suburban markets that offer those things.”
The Kidder Mathews panel sees return to the office as the eventual and essential comeback story helping the beleaguered urban retail scene. It will not only boost local retailers and restaurants looking to recapture the walk-up day consumer, said Paulsen, but also the hotel, convention, and tourism sector, Zimmerman added. Citing the Seattle metro cities, Kidder Mathews SVP Monica Wallace asserted that the key will be to get the non-tourists, such as employees, business travelers, and regional residents, to start “making the trek back into the city.”
“My feeling is that remote working is going to diminish over the next two years,” said Jim Kruse, Kidder Mathews Regional President for Greater L.A. “That alone will bring people back into the areas of commerce.”
Retail and Inflation
And to the final and freshest question for retail: how will inflation shake up the CRE sector? On one hand, you have GDP contraction and inflation exceeding 8%, while on the other there’s still strong employment and income numbers across the country. John Austin, Kidder Mathews SVP in Sacramento says some of the underlying factors driving inflation are hitting retailers directly: “Increases in fuel costs, truck driver shortages and supply chain issues will all have an impact on how to get merchandise into the hands of the consumer,” says Austin.
Still, store openings outnumbered store closings seven to one in first quarter 2022, according to a National Retail Federation findings, Coron noted. He added that the majority of the openings are discount/dollar stores and other off-price retailers, suggesting another sector polarization in the making.
Despite the positives, many believe that all of the pent-up demand coming out of the pandemic, including the thirst for experiential offerings, will give way to bigger bills and shaken consumer confidence.
“I feel the spending spree slowing with the cost of money or debt rising too fast,” said Chuck Wells, Kidder Mathews SVP in Phoenix. “Anxiety levels are increasing as we watch prices rise and the stock market fall.” Paulsen added, “The pent-up pandemic push by consumers [is going] for now, yes, but credit card debt is increasing and bill paying is getting tougher. We will see the rise in prices create the pocketbook squeeze reducing consumer spending, which is the bedrock of our economy.”